How Carlos Ghosn may have hidden $70-mn salary, benefits from Nissan

How could one of the world’s most visible employees go about hiding $70 million worth of salary and benefits paid to him by one of the world’s biggest companies, without the company knowing it?

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Two weeks after Tokyo prosecutors arrested Carlos Ghosn for allegedly under-reporting his compensation, that question is still unanswered. What is certain is that Nissan Motor Co.’s own corporate governance rules gave unusual powers to its former chairman, a business celebrity who was given extraordinary deference for having once rescued the automaker from financial ruin. Those powers included near-total say over how much -- and how -- he was paid, according to Nissan’s own internal rules.

Several people familiar with the prosecutors’ investigation now say the probe appears to hinge on a relatively arcane point of accounting -- whether retirement payments were properly booked. Whether or not Ghosn broke Japan’s securities law by feeding the wrong numbers to Nissan’s board and its accountants (at this point, the allegations are unproven), corporate governance expert Jamie Allen says the deeper question is how anyone could have gotten away with something like that.

“It all comes back to a lack of internal controls," said Allen, head of the Hong Kong-based Asian Corporate Governance Association. “If the board genuinely didn’t know that the disclosure of his remuneration was inaccurate, that doesn’t say much for governance. And if they did know, they should take collective responsibility for the failure."

Fights over pay have been a constant for Ghosn almost since the moment he took over in 1999 as chief operating officer of the then-troubled Japanese automaker. Early on, he caught flack for rewarding Nissan’s senior managers for performance instead of seniority.

Later, in 2010, when Japan’s new rules on disclosure of executive compensation outed him as the country’s top-paid boss, he caught flack again. The $10 million he reportedly made that year might not have been out of line by Western standards, but it rankled in Japan where the brash Franco-Brazilian executive was seen to be taking home six times what Toyota Motor Corp.’s chairman made.

It now appears that even those numbers were understated. Ghosn’s salary had actually been much higher before public disclosure was required; to minimize criticism, a plan was devised to defer about half his annual pay until after retirement, keeping the numbers off the books, according to people familiar with the investigation.

Ghosn has denied any rules were broken around deferred compensation, people with direct knowledge of the case have said. His defense is that the amount of such pay wasn’t certain, and therefore it was appropriate to omit it from securities filings, they said. Ghosn hasn’t had an opportunity to respond in public because he’s held in detention, where Japanese law allows people to be kept for weeks without being charged.

Prosecutors were alerted to Ghosn’s alleged wrongdoing after a whistle-blowing tip from inside Nissan. The timing prompted some analysts to say the scandal may have been manufactured in order to block a merger that Ghosn was advocating between Nissan and its partner, Renault SA.

If Ghosn’s celebrity once helped him rally Nissan’s troops, it may have also made misbehavior easier. Inside the company, an unquestioning cult-of-Ghosn took root, according to several people familiar with the situation. By 2015, when Japan introduced its corporate governance code, it was clear even to some within the company that Nissan was an outlier in terms of how much control it gave its chairman. “We had governance in name only," Nissan Chief Executive Officer Hiroto Saikawa told the media after Ghosn’s arrest.

“Ghosn’s team thought that the best way to ensure governance was to concentrate power,’’ said Satoshi Egi, an expert on corporate compliance at Tokyo’s NLI Research Institute. “It works when you have outstanding leadership. And it’s risky when you don’t.’’

Zuhair Khan, an analyst at Jefferies Inc. in Tokyo, had been warning investors for years that Nissan stood out for its poor governance. Two years after Japan adopted its corporate governance code, Khan says Nissan was the only big, Japanese global company with a board that still didn’t have the required two independent directors.

Independent directors were eventually hired, but only after an embarrassing recall scandal in 2017, when it was discovered that vehicle safety inspections had been performed by unqualified workers. The qualifications of the new board members also raised eyebrows. One was a retired government bureaucrat. The other was an ex-race-car driver and former model.

“It was as if they purposely picked people who wouldn’t be able to ask questions," Khan said.

Japan’s corporate governance code is closer to a wish-list than a set of actual regulations. Firms aren’t forced to comply but must give shareholders an explanation in any instance where they haven’t.

One guideline Nissan chose not to adopt was setting up independent advisory committees on executive pay. The omission gave Ghosn broad power to decide how much he was paid. It also allowed him to determine the compensation of the people who were supposed to keep him in check.

Nissan’s Corporate Governance Report says plainly: “The chairman of the board determines the compensation of each director’’ based on consultation with the company’s two other top officials -- one of whom was Greg Kelly, the American arrested along with Ghosn.

Employees in Nissan’s finance department weren’t responsible for verifying the details of C-suite salary numbers disclosed in annual securities reports, according to one person familiar with company’s practices. That was the board’s job, but no one dared to ask questions, the person said.

Nissan spokesman Nicholas Maxfield declined to comment for this story.

Hui Chen, a compliance expert and former attorney at the U.S. Department of Justice, says the bigger and more complicated the company, the more opportunity for misbehavior by top executives. Sprawling businesses like Nissan may have hundreds of subsidiaries, operating in dozens of countries, each with its own sets of books and payrolls -- which is why, she said, oversight is so important.

“The general fact pattern here indicates that questions should be asked about Nissan’s corporate governance and corporate culture," she said.